Inflation to hit European retail property in 2011 - report

LONDON Rising inflation caused by surging commodity prices could negatively impact European retail property markets next year, causing occupier demand to weaken and prompt further tenant defaults, a report said on Tuesday.

"One of the key destabilising risks on the horizon is rising inflation ... as raw material prices are increasing globally, retailers will invariably pass on the cost to consumers," the report by property consultancy King Sturge said.

The report on the outlook for European retail property in 2011 said retailers, already facing margin pressures due to rising costs, will also face the twin risks of lower consumer demand and inflation index-linked retail rents.

Inflation-led rent increases, although ostensibly positive for top European retail property landlords -- among them Hammerson (HMSO.L), Unibail-Rodamco UNBP.PA and Eurocommercial Properties (SIPFc.AS) -- could prove to be a double-edged sword.

"The reality is retailers are likely to be very squeezed by substantial rent increases, which are not counterbalanced by higher sales volumes ... landlords are therefore likely to be facing declining levels of lease renewals and even some degree of tenant default," King Sturge said.

In the UK, data on Tuesday showed inflation rose unexpectedly to a four-month high in October, forcing the Bank of England governor to write another public letter explaining why inflation remains so far above target.

Surging inflation could mean further volatility for commercial property investors next year, as retail property markets run the risk of a double dip in values, the report said.

"The UK, so often a pre-cursor to the rest of Europe, is already seeing a marked deceleration in growth and as the end of 2010 approaches, some property sectors are at risk of returning to negative growth," it said.

British commercial property values barely stayed clear of a double dip last month, rising by just 0.1 percent in a subdued market as growth was held down by persistently weak rental values, benchmark IPD data showed last week.

(Reporting by Daryl Loo; Editing by Andrew Macdonald)

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